Calculate the cash flows generated by portfolio

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Consider a two-year 2 5 8 T-note, with face value M = 100,000, and semi-annual yield to maturity y4(Coupon) = 1%. Consider also a ten-year 3 48 T-bond, also with face value M = 100,000, and semi-annual yield to maturity y20(Coupon) = 2%. Assume you expect the term structure to steepen. What trading strategy would you implement that would allow you to benefit from the steepening, while neutralizing the risk fromparallel shifts?

Assume that indeed the term structure immediately steepens: y4 (Coupon)′= 2.5% andy20 (Coupon)′= 5%. What are the profits from the trade? (You can use the duration based approximation to calculate the cash flows generated by your portfolio.)

Reference no: EM133072223

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